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News Release

FOR IMMEDIATE RELEASE
Tuesday, March 23, 2004

Contact: CMS Public Affairs
(202) 690-6145

Medicare Trustees Release Annual Report

The Medicare Trustees Report issued today underscores the need for America to remain on the path of strengthening and reforming the Medicare program, as well as the overall health care system, so Medicare can continue providing future generations of Americans with the benefits of modern medicine in a cost-effective manner.

HHS Secretary Tommy G. Thompson said Medicare is providing seniors with more access to the benefits of modern medicine than any time in its history, while also incorporating essential new reforms that will give Medicare more tools to take further steps to keep the program secure. The trustees report states that Medicare's Hospital Insurance (HI) Trust Fund is projected to be exhausted in 2019, seven years earlier than projected in last year's report (2026).

"The reforms built into the new Medicare law often get overshadowed by the new prescription drug benefits, but these reforms provide more tools to use to improve the solvency of the program," Secretary Thompson said. "Medicare provides America's seniors and persons with disabilities with access to the highest quality health care, and we made the program even better by adding coverage for prescription drugs and more preventive care. We must continue building on the reforms we added to Medicare."

The Medicare trustees report cites several factors for its new projection, including: higher spending and lower tax revenues in 2003 than projected (accounts for two years), associated assumption adjustments (1.5 years), improved data on the health status of beneficiaries in health plans (1 year), and model refinements for estimating certain hospital payments (0.5 years). The new Medicare Modernization Act accounts for only two years of the seven-year difference in solvency dates. Yet the new law includes many important reforms that will enable Medicare to take even further steps to improve its financial outlook. In addition, outside of Medicare, the administration has developed several initiatives to improve health care quality and stem the rising costs of health care.

The new reforms and new tools to Medicare that will help address its financial condition include:

  • New fiscal safeguards that provide a better measure of Medicare solvency and trigger action by the President and Congress to keep the program solvent.
  • Private plan competition and choice.
  • More preventive care to improve senior's health and help them avoid costly hospital stays or the expense of treating worsening conditions.
  • Disease management programs to lower the costs of chronic illnesses.
  • E-prescribing to reduce costs, including the costs of medical errors.
  • Reductions in fraud and abuse to save $35 billion. This includes addressing the overpayment for "Part B" drugs covered by Medicare and implementing competitive bidding for certain Medicare services.
  • Provisions to bring lower-cost generic drugs to the market sooner.
  • Health savings accounts to encourage savings to help pay for medical expenses.

Other provisions in MMA to help contain the rate of growth in Medicare spending include steps to reduce costs, such as reforming Medicare contracting processes and requiring Medicare beneficiaries with high incomes to pay for a larger portion of their Medicare Part B coverage. The provisions also include better information on the quality and effectiveness of Medicare services, and new evaluations of innovative approaches to providing care for seniors and persons with disabilities.

Secretary Thompson said the administration also is taking innovative steps to stem the rising cost of health care in general. These efforts, which he said would benefit both the overall health care system as well as the Medicare system, include:

  • Medical liability reform. This is critical to reducing the costs of health care and improving the quality of care.

  • Modern technology. Efforts to improve technology and integrate new technology into the health care system will help lower costs by reducing medical errors and improving the efficiency of health care delivery. HHS has been at the forefront of this endeavor through various initiatives, such as creating incentives for bar-coding systems in hospitals. These initiatives will make it possible to implement e-prescribing and better quality information.

  • Making health care more affordable. The president has proposed refundable tax credits to help low-income workers purchase health insurance coverage, and he proposed allowing small businesses to band together through association health plans. These initiatives would help America's working families have greater access to affordable health insurance.

More Details of the Trustees Report

The Trustees Report includes new, overall measures of Medicare's expected costs and program revenues that make clear that funding for Medicare outside of the HI Trust Fund will be increasingly important for the program. As a result of the new law, the Supplementary Medical Insurance (SMI) component of Medicare is now composed of two parts, Part B and Part D, each with its own separate account within the SMI trust fund.

The Part D account of the SMI trust fund was established in 2004 by the MMA to fund the Medicare prescription drug benefit. These benefits will increase the total cost of Medicare by an estimated one-fourth when they begin in 2006, and are projected to grow more rapidly than Part B costs.

Financial Trigger

Title VIII of the MMA will require the Medicare Trustees' annual report on the financial solvency of Medicare to include a new section monitoring the rate of Medicare spending growth and the use of general revenues.

If general revenues are projected to finance more than 45 percent of total Medicare spending for two consecutive years as captured in the Trustees' reports, the President would be required to submit a legislative proposal to address the problem. This legislative proposal would be given special fast-track consideration in the Congress under the new law.

This new monitoring procedure will alert HHS and the Congress to the rapidly increasing health care costs in Medicare. This will allow both the Administration and the Congress to develop new legislation to effect necessary changes to the program to ensure that spending is controlled

Hospital Insurance Trust Fund (HI)

The trustees estimate that the Hospital Insurance Trust Fund will remain solvent until the year 2019, based on the most probable economic and demographic assumptions. This projected date represents a seven-year loss for estimated Part A solvency, from the forecast of 2026 made by the trustees last year.

Supplementary Medical Insurance Trust Fund (SMI)

As in previous years, the trustees find that the Supplementary Medical Insurance Trust Fund (covering Part B and Part D of Medicare) remains adequately financed into the future-but only because of its financing structure. The financing mechanism for both parts requires general revenues and beneficiary premiums to be adjusted automatically each year, thereby providing guaranteed funding.

Part B spending is experiencing rapid growth-over 10 percent in each of the last 4 years-with costs expected to nearly double over the next 10 years and to accelerate further as the first members of the baby boom generation enter the program in about 2010.

The Part B account ran a deficit of $10.3 billion in 2003, because the beneficiary premiums and general revenue financing were set before the Consolidated Appropriations Resolution of 2003 was enacted, raising Medicare physician payments significantly and increasing Part B costs over the scheduled financing. In 2004, the Part B account is again expected to run a deficit (of $1.7 billion) because the beneficiary premiums and general revenue financing were set before the MMA was enacted, further increasing Part B costs. As a result, premiums and general revenues in 2005 and later will have to be adjusted upward significantly to match the higher level of costs.

The Part D account within the SMI trust fund was established by the MMA. For 2004 and 2005, the Transitional Assistance Account will cover the transitional assistance to low-income beneficiaries required as part of the Medicare-approved Prescription Drug Discount Card Program. Beginning in 2006, beneficiaries can obtain the new prescription drug benefit by voluntarily purchasing insurance policies from stand?alone companies or through private Medicare Advantage health plans. The premiums established by these plans will be heavily subsidized by Medicare. In addition, Medicare will pay some or all of the remaining beneficiary drug premiums and cost?sharing liabilities for low?income beneficiaries. Medicare will also pay special subsidies on behalf of beneficiaries retaining primary drug coverage through qualifying employer?sponsored retiree health plans. These benefits are expected to grow more rapidly than Part A or Part B costs, consistent with historical growth patterns.

Rising SMI costs have a direct impact on beneficiaries and society at large. Over time, the Part B and Part D premiums and coinsurance amounts paid by beneficiaries would typically represent a growing share of their total Social Security and other income. In addition, SMI general revenue financing is expected to grow as a share of total income taxes.

Medicare Overall

The new overall measures of Medicare's financial outlook show that taken together, total costs for HI Part A and SMI Parts B and D are projected to increase substantially over the next 75 years-growing from 2.6 percent of gross domestic product (GDP) today to 13.8 percent by 2078. The level of Medicare expenditures is expected to exceed that for Social Security in 2024 and, by 2078, to represent almost twice the cost of Social Security. At the same time, total Medicare revenues will also increase substantially from 2.6 percent of GDP today to 9.8 percent in 2078, with 6.2 percent of that 9.8 percent directed to Medicare from General Revenues. In addition, in 2078, the gap between Medicare revenue and Medicare spending for Part A would be the equivalent of 4 percent of gross domestic product. This difference is attributable to the projected imbalance in the HI trust fund.

"The projections shown in this report continue to demonstrate the need for timely and effective action to address Medicare's financial challenges-both the long?range financial imbalance facing the HI trust fund and the continuing problem of rapid growth in both HI and SMI expenditures," the report said.

The Medicare trustees are Treasury Secretary and Managing Trustee John W. Snow, Secretary of Health and Human Services Tommy G. Thompson, Labor Secretary Elaine L. Chao and Social Security Commissioner Jo Anne B. Barnhart. Two other members, the public trustees, are appointed by the President with Senate confirmation. The public trustees are John Palmer and Thomas Saving. They serve four-year terms and represent the general public. Dennis Smith, acting administrator of the Centers for Medicare & Medicaid Services, serves as secretary to the Board of Trustees.

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Last Revised: March 23, 2004

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